A line of credit as the shock absorber in your mix

No funding mix lines up perfectly. A customer pays a week late, a supplier wants a shipment paid before your peak arrives, a GST return lands in a quiet fortnight. Each of the other pieces in your mix is good at one thing; a line of credit is good at smoothing the bumps between them. That’s the role it should play — the shock absorber, not the engine.

How is a line of credit different from a loan?

business.govt.nz describes a line of credit as a revolving amount available from a lender, with interest charged only on the amount used. A term loan is a lump sum repaid on a schedule. That difference makes each suit a different job:

Job	Line of credit	Term loan
Covering a late customer payment	Strong fit	Poor fit
GST or provisional tax date in a quiet month	Strong fit	Possible, if one-off
Seasonal dip, repaid at the peak	Strong fit	Possible
Buying a machine used for years	Poor fit	Strong fit (or equipment finance)
Buying a business	Poor fit	Strong fit
Fit-out of new premises	Poor fit	Strong fit

The rule of thumb: if the money comes back within months, a line of credit suits. If it comes back over years, use a term facility.

How do you size a line of credit?

Build a cash flow forecast — business.govt.nz recommends weekly or even daily forecasting to stay on top of day-to-day cash — and find the lowest point across the next 12 months. Include:

• every GST date (the 28th of the month after each period, with 7 May and 15 January exceptions);
• provisional tax instalments;
• the slowest month of the year;
• a realistic late-payment scenario from your biggest customer.

The limit should cover that low point plus a margin. Much bigger than that, and it becomes tempting to fund things a line of credit isn’t built for. Our page on sizing a funding gap explains the forecast method.

Where does a line of credit sit in a remix?

Usually near the end of the sequence, after the cheaper and more specific pieces:

1. Supplier terms and customer deposits shrink the gap.
2. Invoice funding or equipment finance covers the parts tied to specific assets or invoices.
3. A term loan or property-secured funding covers any long-term investment.
4. The line of credit catches the timing gaps that remain.

See ordering your funding sources for the reasoning behind that order.

How do you stop a line of credit becoming permanent debt?

This is the trap. A facility that never returns to zero is no longer a buffer — it’s a loan you’re paying for without a plan to repay it. Habits that help:

• Set a clear-down target. For example, back to zero at least once each quarter, or after each seasonal peak.
• Track the low point and the high point each month. If the low point keeps rising, something structural is wrong.
• Don’t use it for long-life purchases. Fund those with the right term piece.
• Fix the root cause. If you’re always drawing, look at pricing, debtor days or overheads. The guide on freeing up cash before borrowing can help.

Illustrative example: an Auckland wholesale distributor

Illustrative only; no real business.

An Auckland food distributor buys stock on 30-day supplier terms and sells to cafés on 20th-of-the-month terms. Most months line up. But twice a year a large import arrives and must be paid before customers buy it, and the two-monthly GST return sometimes lands in a quiet week. A forecast shows the worst point at about $85,000 short.

The distributor arranges a $100,000 line of credit in a strong month. It draws for import payments and GST dates, repays as sales come in and clears the facility to zero at least every quarter. Its occasional large import of a new range is funded separately with a short term loan, so the line of credit stays a buffer.

If you’d like to set up a buffer like this, ask a real person whether it fits.

When should you not use a line of credit?

• When the “gap” is actually a long-term investment — use a term facility.
• When the business is losing money each month — a line of credit only delays the problem.
• When you’re using it to pay other debt — that’s usually a sign to restructure.
• When there’s a cheaper piece available: extra supplier time, deposits or invoice funding for B2B debtors.

For seasonal businesses, see the slow season remix; for stock-heavy businesses, the stock remix. Test your plan with the repayment load test.

What will a lender look at for a line of credit?

Because a line of credit can be drawn and redrawn, lenders focus on the business’s ongoing cash pattern rather than one specific purchase:

• Bank statements over six to twelve months, showing regular deposits and how low the balance tends to go.
• Turnover from GST returns or financial statements.
• Existing debt and how well it’s being serviced.
• Tax position — returns filed and any IRD debt under an arrangement.
• Security, for larger limits — property or a general security agreement.

Applying straight after a strong trading period shows the business at its best. That’s another reason to set the buffer up before the quiet months, not during them.

Ready to add a buffer to your mix?

A line of credit is easiest to arrange when you don’t urgently need it. Tell us about your cash cycle — your busiest and quietest months, your GST timing and how quickly customers pay — and a real person will talk through whether a buffer fits. There’s no credit check to start, and your enquiry isn’t spread across a list of lenders. Accurate figures on the form get you the right limit first time.